DC Plans Important to Retirement Savings

December 4, 2013 (PLANSPONSOR.com) – A new research paper finds defined contribution (DC) retirement plans play a growing and important role in retirement savings.

The paper, “Our Strong Retirement System: An American Success Story,” was jointly developed by the American Council of Life Insurers, the American Benefits Council and the Investment Company Institute (ICI). The paper’s authors cite DC plans as “providing a critical source of savings for millions of American workers at all ages and income levels.”

DC plans are popular and successful with employees and employers, according to the paper. The authors point to the fact that, with consistent contributions over time, DC plans can “generate substantial retirement benefits, especially when combined with Social Security.”

The paper also finds that:

  • Americans’ retirement well-being has improved over time, as successive generations of retirees have been better off than previous generations.
  • Almost 80% of full-time employees have access to employer-sponsored retirement plans, with more than 80% of those employees participating.
  • Those near retirement (ages 60 to 64) have, on average, nearly $360,000 combined in their DC accounts and individual retirement accounts (IRAs).
  • Since American workers tend to move from job to job over their career, the 401(k) is a good fit because it is portable. When employees accumulate retirement savings in one job, those assets grow with them when they change jobs.
  • Americans report high levels of confidence in the 401(k) system, despite recent market turmoil. They also appreciate its user-friendly features including the tax benefits, convenience of payroll deduction, control over their own assets and choice of distribution options.
  • Retirement assets constitute a major share of U.S. households’ savings and investments, providing more than $20 trillion ($5.3 trillion from DC plans alone) in private investment capital for American businesses.
  • Innovation and incentives improve retirement security, which are demonstrated by plan features such as automatic enrollment, automatic escalation and lifecycle investing.

The authors of the paper conclude, “The current retirement savings system is fostering economic security in retirement for Americans across all income levels. DC plans have grown in importance in U.S. retirement accumulations, rising to be a key component of the voluntary, private-sector employer-sponsored system. DC plans are not just working, they are strong.”

Sarah Holden, ICI senior director of retirement and investor research, adds, “Looking at the research done by well-respected academics, it’s clear that the current retirement system is serving Americans well, with each successive generation doing better than the one before it. We can and should build on that success.”

Those interested can download either the full paper or a summary.